WITHHOLDING TAXES

BY SYED NADEEM HASSAN

NATURE OF WITHHOLDING TAXES

Taxation of income Income earned during a specific period Taxation after the period of earning income [TAX YEAR] Further period of 3 to 6 months to calculate & pay tax (filing of return) Lump sum payment of tax burdensome for the taxpayer Tax payment during the process of earning income easier to pay Hence the concept of advance tax

NATURE OF WITHHOLDING TAXES

How to collect advance tax during the process of earning income Appropriate solution recover due tax at the time of transaction giving rise to generation of income Make one person legally responsible for tax collection on behalf of Government Hence the concept of withholding taxes Person responsible for tax collection at the time of transaction Withholding agent

COLLECTION/DEDUCTION AT SOURCE
To collect a percentage of certain amount as advance tax while receiving payment Collection at source To deduct/withhold a percentage of certain amount as advance tax while making payment Deduction at source Basic Principle
Pay as you earn

Withholding/Collecting Agents
Each WH provision has its specific Prescribed Person [WH agent] Two broad categories A) Tax Paying Organizations Company [S.80(2)] Associations of persons constituted by or under law Ordinary AOP with turnover of Rs.50(M) or above in T.Y. 2007 or in any subsequent tax year An individual with turnover of Rs.50(M) or above in T.Y. 2009 or in any subsequent tax year Employers irrespective of their status

Withholding/Collecting Agents
B) Non Tax Paying Organizations

Federal/Provincial Governments/Organizations Collector of Customs Local Governments / Deptts. /District Govts. Non-Profit Organizations International Agencies, Diplomatic Missions & NR Entities

Relevant Provisions
Income Tax Ordinance,2001:
Collection of tax Section 148 Deduction of tax-Sections 149 to 156B Transitional advance tax provisions - Sections 231A to 236B General provisions-Sections 158 to 169 Records, Information collection & Audit-Sections 174, 175, 176 & 177 Penalty/ prosecution-Sections 182, 191 Default surcharge - Section 205(3) Inadmissible deductions-Section 21

Relevant Provisions
Notifications
SRO 947(I)/2008 dated 05.09.2008 SRO 586(I)/1991 dated 30.06.1991

Income Tax Rules,2002

Rules 41 to 44

2nd Schedule
Part I & Part IV

W.H. Provisions
S.148 Import S.149 Salary S.150 Dividends S.151 Profit on debt S.152 Payments to non-residents S.153 Payments for goods and services S.153A Payments to non-resident media persons S.154 Exports

W.H. Provisions

S.155 Income form property S.156 Prizes and winnings S.156A Petroleum Products S.156B Withdrawal of balance under Pension Fund S. 231A Cash withdrawal from a bank S.231AA Advance tax on banking transactions 231B Tax on private motor vehicles S.233 Brokerage & commission

W.H. Provisions
S.233A Collection of tax by Stock Exchange S.234 Tax on motor vehicles S.234A CNG stations S.235 Electricity consumption S. 236 Telephone users S.236A Advance tax on sale through auction 236B Tax on purchase of air ticket

Buyer

Goods

Seller

Payer

Payment

Recipient

W.H. Provisions
Who is WH Agent Who is taxpayer/ recipient What is nature of transaction On which amount Rate of tax Exemptions/exceptions Tax adjustable or non-adjustable

Section 148 - IMPORTS

Nature of transaction
Import of goods

Withholding Agent
Collector of Customs

From whom
Every importer of goods

Rate of tax - 5% On which amount

Value of goods as determined under section 25 of the Customs Act, 1969, as if the goods were subject to ad valorem duty increased by the customs duty, Federal Excise duty and sales tax, if any, payable in respect of the import of the goods.

Section 148 - IMPORTS

When to collect
At the same time and manner as the customs duty is payable

When to deposit
At the time and in the manner PRESCRIBED If W.H. Agent is Government On the same day If W.H. Agent is any other person within 7 days of collection

Where and how to deposit

On prescribed tax payment receipt In State Bank or National Bank

Section 148 - EXCEPTIONS

Under S.148
Goods specified by Board

Under SRO 947(I)/2008 dated 05.09.2008

Federal, provincial, local Govt. Import of machinery by industrial undertaking Import of machinery for execution of contract with Govt.

Under 2nd Schedule Part II

Reduced rate of 1% on import of fibres, yarn and zero-rated goods, gold, silver, mobile phones 3% rate on raw material

Under 2nd Schedule Part IV

Clause (56),(76), (77)

Section 149 - SALARY

Nature of transaction
Payment of salary

Withholding Agent
Every employer

From whom
Employee

Rate of tax
Average rate of tax

Basis
Tax rates specified in the First Schedule

On which amount
Estimated income under the head salary for the tax year in which payment is made

Section 149 - SALARY

When to deduct
At the time salary is paid

When to deposit
If W.H. Agent is Government On the same day If W.H. Agent is any other person within 7 days

Where and how to deposit

On prescribed tax payment receipt In State Bank or National Bank

Treatment of tax deducted

Adjustable against tax payable on taxable income

Section 153 - PAYMENT FOR GOODS AND SERVICES

Nature of transaction Payment for sale of goods [153(1)(a)] rendering of services [153(1)(b)] execution of a contract , other than a contract for the sale of goods or the rendering of services [153(1)(c)] Services of stitching, dyeing, printing, embroidery, washing, sizing and weaving acquired by an exporter or export house [153(2)]

Section 153 - PAYMENT FOR GOODS AND SERVICES

Nature of recipient Resident persons
Resident company Resident AOP Resident individual

P.E. in Pakistan of a non-resident person

Section 153 - PAYMENT FOR GOODS AND SERVICES

Withholding agents [S.153(7)] Federal Government Company [Small company not a WH Agent from T.Y.2006 to T.Y.2009] Association of Persons constituted by, or under law Ordinary AoP (based on turnover) [From 01.07.2008 onwards] Individual (based on turnover) [From 01.07.2010 onwards]

Section 153 - PAYMENT FOR GOODS AND SERVICES

Withholding agents [Contd..] Non-profit organization [From 01.07. 2009 onwards] Foreign Contractor or Consultant A Consortium or Joint Venture An exporter or an export house in terms of subsection (1A) [From 01.07.2006 onwards]

Section 153 - PAYMENT FOR GOODS AND SERVICES

Transaction amount
Gross amount of payment on account of: sale of goods (inclusive of sales tax) rendering of services execution of a contract , other than a contract for the sale of goods or the rendering of services services of stitching, dyeing, printing, embroidery, washing, sizing and weaving acquired by an exporter or export house

Section 153 - PAYMENT FOR GOODS AND SERVICES

When to deduct
At the time the amount is actually paid [S. 158 (b)]

When to deposit [S.160]

As prescribed [Rule 43 of Income Tax Rules, 2002]
By Federal/Provincial Govt. Same day By other WH agents Within 07 days from the end of each week ending on every Sunday [SRO 392(I)/2009 dated 19.05.2009]

Section 153 - PAYMENT FOR GOODS AND SERVICES

Rates [Div-III & IV, Part III, 1st Schedule]
1.5% in the case of sale of rice, cottonseed or edible oils 3.5% in the case of sale of any other goods 6.0% in the case of execution of contacts 6.0% in the case of services rendered 2 % in the case of Transport services 0.5 % in case of services rendered to an exporter or an export house

Section 153 - PAYMENT FOR GOODS AND SERVICES

Rates [Part II, 2nd Schedule]
1% in case of services rendered outside Pakistan [Clause (3)] 1% in case of construction contracts outside Pakistan [Clause (3A)] 2% in case of purchase of locally produced edible oil by manufacturers of cooking oil or vanaspati ghee [Clause (13C)] 1% in case of rice sold to Rice Exporters Association of Pakistan [Clause (13HHH)] 1% in case of payments to distributors of cigarettes and pharmaceutical products & large distribution houses [Clause (24A)]

Section 153 EXCEPTIONS

Through issuance of exemption certificate by the CIR [S.153(4)] On sale of imported goods in the same condition [S.153(5)(a)] Payments to yarn dealers by five zero-rated sectors [S.153(5)(b)] A refund of security deposit [S.153(5)(c)] Payment for construction material supplied by Govt./Local Govt. to a contractor [S.153(5)(d)] Cotton ginner depositing tax himself [S.153(5)(e)] Purchase of an asset under a lease and buy back agreement by a modaraba, leasing company, banking company or financial institution [S.153(5)(f)]

Section 153 EXEMPTIONS UNDER SRO 586

Recipients to whom S. 153 will not apply:
A provincial Govt. A local authority Residents of Tribal Areas of Azad Kashmir Persons holding exemption certificate issued under 159(1)(a) Persons receiving payments for supply of agricultural produce Companies receiving payments for supply of electricity & gas Companies receiving payments for supply of crude oil Refineries & oil marketing companies Hotels & restaurants

Section 153 EXEMPTIONS UNDER SRO 586

Recipients to whom S. 153 will not apply:
Shipping companies & airlines for passenger tickets & cargo charges Persons receiving payments up to Rs.25,000 for sale of goods Persons receiving payments up to Rs.10,000 for contracts & services Persons receiving payments for supply of cotton seed Persons holding exemption certificate to the effect that their income is not chargeable to tax due to carry forward of losses Owners of one goods transport vehicle receiving one payment for a single journey from one payer

Section 153 (3) TREATMENT OF TAX DEDUCTED

In the case of contracts Final tax
Exception: A listed company

In the case of sale of goods Final tax

Exceptions:
A listed company [S.153(6) Proviso] A company as a manufacturer [S.153(6A)]

In the case of services rendered

Final tax up to tax year 2009 Minimum tax for tax year 2010 onwards Exception:
Services rendered by companies Advertisement services by owners of newspapers & magazines

JURISDICTION OF ENFORCEMENT UNITS

Ensure filing of statutory statements [S.165] Ensure maintenance of prescribed accounts, documents and records [S.174] Impose penalty and take other legal actions against noncompliers [S.182 & S.21(c)] Charge tax on defaulting withholding agents [S.161/205] Monitor payment, collection and deduction of tax at source and issue exemption certificates

RESPONSIBILITIES OF W.H. AGENTS

Correct Collection / Deduction of tax at source In accordance with time of deduction of tax [S.158] Deposit of tax within prescribed time & in prescribed manner [S.160] Issuance of certificate of tax deduction to the person from whom tax has been deducted / collected [S.164] Furnishing of monthly statements to the Tax Department, on prescribed forms duly filled in within prescribed time [S.165]

Consequences of non-compliance
Deductions not allowed [Section 21] Recovery of tax not collected or deducted [S.161(1)(a)] Recovery of tax collected or deducted but not deposited/paid [S.161(1)(b)] Charge of default surcharge [S.205(3)] Prosecution [S.191] Penalty for failure:
To furnish statement (s) of tax collected or deducted To deduct/collect/deposit tax [S.182]

Deductions not allowed [Section 21(c)]

In case of not withholding tax at source the following expenditures are not allowed as deduction for the purpose of computing income of W.H. Agent: Salary Rent Brokerage or commission Profit on debt Payment to non-resident Payment for services or fee

Recovery of tax not collected or deducted [S.161 & 163]

The person responsible for collecting or deducting tax at source as a withholding agent is personally liable to pay the amount of tax not collected or deducted [S.161(1)] How to hold personally responsible Afford opportunity of being heard: Issue show cause notice Consider reply of W.H.Agent [S.161(1A)] Pass an order Recover the amount of tax involved

Recovery of tax not collected or deducted [S.161 & 163]

Authority for recovery of tax Tax not deducted/ collected is payable/recoverable as if it is due under an assessment order under the Ordinance [S.163] If tax paid by person from whom tax deduction was due No recovery of principal amount from W.H.Agent Default surcharge to be charged from W.H.Agent [S.161(1B)]

Recovery of tax from the person from whom tax was not collected or deducted [S.162]
If withholding agent fails to withhold tax It can still be recovered from the person from whom it was to be deducted or collected [the recipient] Procedure: Provide opportunity of being heard Pass an order mentioning default of W.H.Agent Recover the principal amount of tax from the recipient of payment [S.162(1)]

Prosecution [S.191(1)(c)]
Any person who without reasonable excuse, fails to comply with the obligation to collect or deduct tax or having collected or deducted fails to pay the tax shall tantamount to committing an offence punishable on conviction with a fine or imprisonment for a term not exceeding one year or both.

Default surcharge [S.205]

When to charge Withholding Agents failure to DEDUCT/COLLECT tax Withholding Agents failure to DEPOSIT tax deducted/collected Rate:
Twelve per cent per annum [up to 30.06.2009] KIBOR + 3% from 01.07.2009 onwards
Daily KIBOR SBP website

On which amount: Amount of tax not collected or deducted Amount of tax not deposited after collecting/deducting For which period: commencing on the date the amount was required to be collected or deducted ending on the date on which it is paid

Statements of Tax Collected or Deducted [S.165]

Rule Statement Description Prescribed Form Due Dates

44(1)

Annual

Statement of tax deducted/ collected [S.165(6)]

Part-IX of 2nd Schedule (Salary)

On or before 31st August

44(2)

Monthly

Statement of tax Part-X (salary & Within 15 days deducted/ non salary) of IInd of the end of Schedule each month collected [S.165(1)]

RECONCILIATION STATEMENT
Power to call for reconciliation statement [Rule 44(4)]
(4) A person required to furnish the statements under sub-rule (1) or (2) shall, wherever required by the Commissioner, furnish a reconciliation of the amounts mentioned in the aforesaid annual and monthly statements with the amounts mentioned in the return of income, statements, related annexes and other documents submitted from time to time.

Penalty [S.182]
Penalty for failure of the W.H. Agent to furnish statement under section 165
0.1% of tax payable for each day of default Minimum penalty- Rs.5,000 Maximum penalty- 25% of tax payable

Penalty for failure to deduct or deposit tax

10% of tax or 25,000 Whichever is higher

ORDER U/S 161/205

The person under consideration is a private limited company engaged in the business of manufacturing plastic pipes and is a prescribed person in terms of sub-section (9) of section 153 of the Income Tax Ordinance, 2001 (the Ordinance). The company is, therefore, required to deduct tax at source while making payments against purchases and services acquired. During examination of record of the company for the period 01.07.2007 to 30.06.2008, it was observed that it has failed to discharge its obligation as a withholding agent while making various payments against purchases and services as detailed below:

Particulars of recipient
M/s ABC & Company, 15 Railway Road, Gujrat M/s Orient Enterprises, Taj Plaza, Shadman, Lahore Mr. Aamir Riaz, Shop No.24, Alamgir Market, Haroon Abad

Nature Amount of (Rs.) payment

Purchase Services 1,000,000 80,000

Date of payment
25.07.2007 10.08.2007

Tax not deducted

35,000 4,800

Purchase

600,000

15.12.2007

21,000

M/s XYZ (Pvt.) Ltd., Office No.9, 1st Floor, Ghazi Market, Sadar, Multan Cantt.

Services

200,000

30.03.2008

12,000

As is evident from above, the company has failed to deduct tax as required under sub-section (1) of section 153 of the Ordinance and is, therefore, personally liable to pay the aforesaid amount of tax under section 161. The Company is also liable to pay default surcharge @ 3% of the aforesaid amount under subsection (3) of section 205 of the Ordinance. A show cause notice under sections 161/205 was accordingly issued on 04.08.2008 in terms of subsection (1A) of section 161 requiring the Company to explain as to why the amount of tax not deducted by it should not be recovered from it under section 161 along with default surcharge under section 205 of the Ordinance. The Company furnished written reply on due date i.e. 16.08.2008, the relevant portion of which is reproduced below for ready reference:

The above reply of the Company has been examined and found to be unsatisfactory for the following reasons: 1. 2. ... The contentions of the Company regarding non-deduction of tax under subsection (1) of section 153 of the Ordinance are accordingly rejected being without statutory authority and merit. The default of the Company under section 161 having been established, it is held personally liable to pay the amount of tax not deducted by it under section 161 along with default surcharge under section 205 of the Ordinance as computed below: Total amount of tax not deducted as detailed above: Rs. 72,800 Tax recoverable u/s 161: Rs. 72,800

Calculation of default surcharge:

Amount
35,000 4,800 21,000 12,000 Total

Due date
25.07.07 10.08.07 15.12.07 30.03.08

End date
16.08.08 16.08.08 16.08.08 16.08.08

Default period
389 days 372 days 209 days 168 days

Default surcharge
Rs.4,476 Rs.587 Rs.1,443 Rs.663 Rs.7,169

Total tax Payable under section 161: Total default surcharge payable:

Rs.72,800 Rs. 7,169